I’m with FP Transitions. We see about 5 percent of financial planners, investment advisors, insurance practitioners — about 5 percent of the profession own what we call firms. A firm is defined mostly by its sustainable nature. It’s got multiple people working together who are all aligned around a common vision, a common purpose. When you want to create a business that has sustainability, that can endure beyond the career of a single practitioner, there are a couple of very important steps that you should take within your business.
When we’re working with financial planners, we focus on the three pillars of sustainability:
- Your organization (your people)
- Your entity (your shareholders agreement, corporate structure, operating agreement)
- The compensation model
These three pillars work together to support a business that has profitability and growth.
The organization, the people, the processes that come together to provide a client service model that can expand beyond a single professional are really what make an enduring firm unique. When you are talking about an enduring firm, the primary value drivers that you have are profitability and growth.
So how do we create a profitable business? When we’re focusing on the three pillars of sustainability, you have multiple professionals who are working together. You have a whole team of people who can work together to support the growth and the longevity of the business. You have a whole team of professionals who work together to service the clients. And each of those professionals should be paid a reasonable professional salary or wage if you’ve got part-time administrative assistance.
Now, it’s important to ensure that you can preserve your profit line for ownership. So when you have multiple professionals who are working together, you have salary for where they are in their career, for the role that they provide within the company and the region that you are in. When you’re building an enduring firm, we don’t recommend highly commission-based compensation. We don’t recommend an “eat what you kill” compensation model within an enduring team because it creates misalignment; it creates fracture lines between professionals. That misalignment comes between the individual producers and the owners who want to control the equity.
When we talk about an “eat what you kill” compensation structure, we talk about bringing professionals into your company where their compensation is dependent on bringing in clients, servicing clients and producing commissions or fees. When the compensation for professionals on your team is tied directly to their ability to produce revenue, exclusively to their ability to produce revenue, what we see happen is advisors who are trying to build a firm creating separate books within their team.
If you do not have control over those client relationships, if you do not have control over that revenue stream, then you cannot influence where those clients will go when you decide to sell the practice. When you are going from running a practice to a firm, the emphasis in your business and in your strategy needs to be on creating a profit. Then, as you plan year by year, it’s making sure that that profit continues to grow. When we work with practices and transition them into a firm, sometimes looking at the compensation structure, we start with just a 10 percent profit ratio. Ten percent of your gross revenue goes into the owner’s profit. We work those businesses up to a 30 percent profit ratio, which increases the return to owners within the business. And this helps to support a paradigm shift among practice owners from being the target of acquisition to being the target of investment.
When you are focused on your top-line revenue, when you are focused on sticky relationships and low overhead and recurring revenue, you are the target of acquisition. And as you’re looking at other practice owners within the profession, within your networks, they are the target of acquisition for those characteristics. If you can structure your organization and your profit or your organization and your compensation and your entity to support profit and growth, you can become the target of investment, not only from your own internal partners and your own internal team, but private equity, which has gotten highly interested in investment management and financial planning. We see private equity coming in to support the growth of firms that have significant profit and a history of growth. If you can shift your perspective from being a target of acquisition to being a target of investment, that helps to support the decisions you need to make within your business.
So here’s where investing in sustainability and investing in your entity, your organization — bringing in multiple professionals and creating a professional compensation strategy that is tied to salaries for your role, bonuses for going above and beyond, and keeping profit as the reward for ownership or investment — really becomes compelling. If you’re creating a sustainable business, you preserve more options for you in the long term as we structure a business that has an enduring entity.
I talked about practices being teams that produce about $500,000 in revenue to about $1 million in revenue. And the important thing as you pass that million-dollar threshold is to make sure that you are structuring your team with the right organization and that you’ve got that entity in place.
As we are talking about the challenges of running a sustainable business, the biggest hurdles that people encounter are navigating the complexity. You need to make the change from being a single practitioner and controlling all the decisions to being able to open up responsibilities, open up the job descriptions and identify how everybody’s going to work together. As you’ve got a team that is working together to grow the business, identifying the strategic focus for everyone can be challenging to build that alignment. When we’re working with advisors who want to create a sustainable team, we lean on benchmarking frequently to identify the key performance indicators that need to be focused on to build a business.
As you’ve got four, five or 10 people who are working together, we use benchmarking to make data-driven decisions. What is your profit per professional within the business? Are you efficient in your client services because you are producing profit for each of the clients you work with? Are you successful with your marketing? Because you can bring in net new clients for every marketing dollar that’s spent. And if you go through the benchmarking as a team and you can identify your roles and responsibilities, then everybody can be working toward a common goal of bringing in net new clients, servicing them appropriately and growing the profit of the business.
As advisors go from being practice owners to aiming for a firm, it’s fairly common that there are multiple entities kind of working together with different revenue-sharing arrangements and pooling of expenses. You’ve got one S corporation or LLC that’s paying fees to another to cover the lease or the rental of the printer and things like that. So we take the whole organization and make sure that everyone is unified under a single entity.
